Already a member?

The Commodities ETF Crackdown Continues

The threat of increased regulation from the Commodities Futures
Trading Commission continues to impact the ETF industry. Increased
position limits are designed to reduce the impact that ETFs such as
United States Natural Gas (
UNG
) have on the price of the commodities they are designed to track.
The latest chapters in the futures regulation saga are the
shuttering of PowerShares DB Crude Oil Double Long ETN (
DXO
) and the reconfiguration of the PowerShares DB Agriculture (
DBA
) and PowerShares DB Commodity (
DBC
) ETFs.

DXO was truly a victim of its own success. This leveraged
exchange-traded note became so large that it was subject to
limitations placed on its underlying components. Deutsche Bank
considered the crackdown a "regulatory event" and redeemed the $407
million in outstanding notes on September 9. Its opposite, the
PowerShares DB Crude Oil Double Short ETN (
DTO
), continues to trade.

Rather than shutting down futures-based DBA and DBC, two other
popular commodities ETFs from PowerShares and Deutsche Bank (
DB
), fund managers decided to restructure the underlying portfolios
in order to stay within position limits. The CFTC altered the
course of these two funds with new "safety position limits" and the
revocation of an exemption that previously governed the fund's
futures-buying capabilities.

The closing of DXO and restructuring of DBA and DBC represent a
critical point in the development of the ETF industry. Regulation,
not methodology, is shaping the capabilities of these exchange-
traded products just as they are reaching new heights of
popularity.

Nevertheless, new restrictions on futures-based commodity
products will likely not stem the growth of the commodities ETF
industry as a whole. While futures-based products are closed or
restructured, issuers will continue to introduce new products
without limitations.

Physically backed ETFs such as iShares Comex Gold (
IAU
) could play a greater role in the ETF universe as investor
interest in commodities increases and uncertainty hangs over
derivatives-based products. ETF Securities, a global ETF issuer,
recently launched both the ETFS Silver Trust (
SIVR
) and ETFS Gold Trust (
SGOL
) to compete with entrenched competitors like IAU and SPDR Gold
Shares (
GLD
) in the U.S.

Jefferies has also jumped on the commodities ETF bandwagon with
the launch of the Thomson Reuters/Jefferies CRB Global Commodity
Equity Index Fund (
CRBQ
). Rather than owning commodities futures or physical stockpiles,
this fund invests in a basket of commodities-driven equities.
Owning an ETF like CRBQ that tracks companies such as ExxonMobil (
XOM
) or Potash (
POT
) will certainly provide indirect exposure to commodities, but it
will be less of a pure play on prices than is a futures fund like
DBC, and it will offer less diversification to this separate asset
class.

For more than a decade, ETFs have offered investors inexpensive
access to specific sectors and regions of the global economy that
were previously difficult to access. Increased regulation and
position limits may be good for investor protection in the long
haul, but in the short term these changes are caustic to
derivatives-based products. Until definitive regulatory action is
taken, investors should stick with physically backed ETFs like IAU
or equities-based products like CRBQ.

Please note that once you make your selection, it will apply to all future visits to NASDAQ.com.
If, at any time, you are interested in reverting to our default settings, please select Default Setting above.

If you have any questions or encounter any issues in changing your default settings, please email isfeedback@nasdaq.com.

Please confirm your selection:

You have selected to change your default setting for the Quote Search. This will now be your default target page;
unless you change your configuration again, or you delete your
cookies. Are you sure you want to change your settings?